Tuesday, August 01, 2006

Political Markets

In a post the other day, I mentioned that the stock market has performed better under Democratic administrations than Republican ones. That elicited some dis-belief from several readers, so here are the numbers:

When the Republican Party controls the White House and both houses of Congress (three periods), the S&P 500, on average, has increased 3.3%.

When Republicans control the White House and Senate and the Democratic Party controls the House of Representative (three periods), the average return has been 22.4%.

When Republicans control the White House and the Democrats control both houses of Congress (seven periods) the average return has been 13.9%.

When Democrats control the White House and both houses of Congress (seven periods) the average return has been 14.7%.

When Democrats control the White House and Republicans control both houses of Congress (three periods, all during Bill Clinton's administration), the average return was 44.9%.

I don't think the important factor here is party, but rather policy. The best period was during the Clinton administration and certainly Clinton was not a typical Democrat. He was a centrist from the Democratic Leadership Conference, which has practically no influence on the current Democratic party. Likewise, the period of complete Republican control, which shows the worst performance, was from McKinley to Taft, Harding to Hoover, and for two years during the Eisenhower administration. Considering that the middle portion, Harding to Hoover, includes the beginning of the Great Depression, I'm amazed that the number is positive.

The point is that the important factor is not the party in power, but the policies being enacted. Herbert Hoover signed into law some awful policies --- Smoot and Hawley were both Republicans. Richard Nixon enacted price controls and abolished the last link of the dollar to gold. Kennedy cut taxes. Clinton signed welfare reform and cut capital gains taxes. Good policy is good policy and bad policy is bad policy.

The question is what will we get in the future and how will it affect our investments. Two prominent policies that may be affected soon are the minimum wage and estate taxes. In my opinion, minimum wages are bad policy no matter the level because they distort the labor market. Having said that, unless there is a very sharp downturn in the economy, I don't think the planned increases will have a dramatic impact. An increase will probably marginally increase teenage unemployment, and while that may be distressing to parents, it probably doesn't have a huge impact. Likewise, the estate tax. Philosophically, I am opposed to estate taxes. It seems pretty low for the government to appropriate property honestly earned just because the earner has the misfortune to die without the benefit of a good tax attorney, but the affect on the economy shouldn't be that great.

There may be some individual companies that are affected by these policies, but overall I don't think there is much threat to the overall economy. Of greater concern, is the expiration of the tax cuts and I'll cover that in a future post.

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